<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of l934
For Quarter Ended June 30, 2000
Commission File No. 000-27377
W HOLDING COMPANY, INC.
-----------------------
Incorporated in the Commonwealth of Puerto Rico
IRS Employer Identification No. 66-0573197
Principal Executive Offices:
19 West McKinley Street
Mayaguez, Puerto Rico 00680
Telephone number: (787) 834-8000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock ($1.00 par value)
7.125% Noncumulative, Convertible Monthly Income Preferred Stock,
1998 Series A ($1.00 par value)
7.25% Noncumulative, Non-convertible Monthly Income Preferred Stock,
1999 Series B ($1.00 par value)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of l934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
The number of shares issued and outstanding of each of the registrant's classes
of stock, as of the latest practicable date (July 31, 2000), is:
Common Stock 41,525,200
7.125% Preferred Stock 1998 Series A 1,219,000
7.25% Preferred Stock 1999 Series B 2,001,000
<PAGE> 2
W HOLDING COMPANY, INC. AND SUBSIDIARY
CONTENTS
<TABLE>
<CAPTION>
Page
PART I FINANCIAL INFORMATION:
<S> <C> <C>
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of
June 30, 2000 and December 31, 1999 1
Consolidated Statements of Income for the Three and Six
Months Ended June 30, 2000 and 1999 2
Consolidated Statements of Changes in Stockholders' Equity and of
Comprehensive Income for the Six Months
Ended June 30, 2000 and 1999 3
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2000 and 1999 4-5
Notes to Consolidated Financial Statements 6-16
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 17-25
Item 3. Quantitative and Qualitative Disclosures About Market Risk 25-26
PART II OTHER INFORMATION:
Item 1. Legal Proceedings 27
Item 2. Changes In Securities and Use of Proceeds 27
Item 3. Defaults Upon Senior Securities 27
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 5. Other Information 27
Item 6. Exhibits and Reports on Form 8-K 27
SIGNATURES 28
</TABLE>
<PAGE> 3
Part I. Financial Information
Item I. Financial Statements
W HOLDING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
--------------- ---------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 46,639,356 $ 55,671,999
Money market instruments:
Federal funds sold and securities purchased under agreements to resell 130,356,948 137,054,546
Interest bearing deposits with banks 8,601,266 9,271,389
Trading securities, at fair value (Note 4) 1,195,438 1,289,188
Investment securities available for sale, at fair value (Note 4) 17,995,821 22,185,441
Investment securities held to maturity, with a fair value of
$1,197,347,000 in 2000 and $1,074,346,000 in 1999 (Note 4) 1,290,960,940 1,174,532,295
Federal Home Loan Bank stock, at cost 15,556,400 12,800,000
Mortgage loans held for sale, at lower of cost or market 2,785,285 2,073,600
Loans, net of allowance for loan losses of $26,882,364 in 2000
and $23,978,449 in 1999 (Note 5) 1,965,892,545 1,869,668,173
Accrued interest receivable 35,452,367 33,311,340
Premises and equipment, net 39,539,673 38,431,276
Other assets (Note 7) 23,520,474 18,281,424
--------------- ---------------
Total $ 3,578,496,513 $ 3,374,570,671
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits (Note 6) $ 2,343,467,688 $ 2,247,864,807
Securities sold under agreements to repurchase 781,824,855 729,967,785
Term notes 79,000,000 79,000,000
Advances from Federal Home Loan Bank 120,000,000 70,000,000
Other liabilities 19,481,015 23,918,771
--------------- ---------------
Total liabilities 3,343,773,558 3,150,751,363
--------------- ---------------
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY (Notes 2, 3, 4, 9):
Preferred stock $1.00 par value per share (liquidation preference $25 per
share); authorized 20,000,000 shares;
7.25% non-cumulative, non-convertible monthly income preferred stock, 1999 Series B -
Issued and outstanding 2,001,000 shares 2,001,000 2,001,000
7.125% non-cumulative, convertible monthly income preferred stock, 1998 Series A -
Issued and outstanding 1,219,000 shares 1,219,000 1,219,000
Common stock - $1.00 par value per share; authorized 300,000,000
shares; issued and outstanding 41,560,200 in 2000 and 42,000,000 in 1999 41,560,200 42,000,000
Paid in capital 95,838,991 99,595,597
Retained earnings:
Reserve fund 15,019,411 12,843,183
Undivided profits 79,749,100 67,218,342
Accumulated other comprehensive loss (664,747) (1,057,814)
--------------- ---------------
Total stockholders' equity 234,722,955 223,819,308
--------------- ---------------
TOTAL $ 3,578,496,513 $ 3,374,570,671
=============== ===============
</TABLE>
See Notes to Consolidated Financial Statements.
1
<PAGE> 4
W HOLDING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- ---------------------------------
2000 1999 2000 1999
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans, including loan fees $ 44,213,165 $ 36,375,931 $ 86,291,647 $ 68,598,750
Investment securities 18,922,986 16,333,778 37,941,552 30,231,498
Mortgage and other asset-backed securities 2,519,060 1,937,534 4,891,206 3,971,308
Money market instruments 2,149,259 1,107,367 4,446,513 2,367,679
------------ ------------ ------------- -------------
Total interest income 67,804,470 55,754,610 133,570,918 105,169,235
------------ ------------ ------------- -------------
INTEREST EXPENSE:
Deposits 28,943,314 21,130,217 57,762,920 40,101,835
Securities sold under agreements to repurchase 11,940,676 7,963,513 22,192,690 14,754,489
Term notes 929,969 986,409 1,894,279 1,975,061
Advances from Federal Home Loan Bank 1,914,980 502,236 2,940,109 914,485
------------ ------------ ------------- -------------
Total interest expense 43,728,939 30,582,375 84,789,998 57,745,870
------------ ------------ ------------- -------------
NET INTEREST INCOME 24,075,531 25,172,235 48,780,920 47,423,365
PROVISION FOR LOAN LOSSES 2,000,000 2,000,000 4,000,000 3,500,000
------------ ------------ ------------- -------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 22,075,531 23,172,235 44,780,920 43,923,365
------------ ------------ ------------- -------------
OTHER INCOME:
Service charges on deposit accounts and other fees 3,504,440 2,743,978 6,821,063 5,617,876
Net gain (loss) on sale and valuation of loans,
securities and other (493,070) 36,700 (581,084) 338,103
------------ ------------ ------------- -------------
Total other income 3,011,370 2,780,678 6,239,979 5,955,979
------------ ------------ ------------- -------------
TOTAL NET INTEREST INCOME AND
OTHER INCOME 25,086,901 25,952,913 51,020,899 49,879,344
------------ ------------ ------------- -------------
OPERATING EXPENSES:
Salaries and employees' benefits 4,731,939 5,536,620 10,079,099 10,712,466
Equipment 2,185,491 1,547,575 4,125,848 2,983,699
Occupancy 1,274,959 1,274,217 2,489,559 2,501,792
Advertising 566,458 1,222,609 1,580,126 2,233,547
Printing, postage, stationery and supplies 541,811 740,482 1,186,976 1,431,137
Telephone 364,650 677,188 863,482 1,229,821
Other 2,893,768 3,055,752 5,556,747 5,517,876
------------ ------------ ------------- -------------
Total operating expenses 12,559,076 14,054,443 25,881,837 26,610,338
------------ ------------ ------------- -------------
INCOME BEFORE PROVISION FOR INCOME TAXES 12,527,825 11,898,470 25,139,062 23,269,006
------------ ------------ ------------- -------------
PROVISION FOR INCOME TAXES:
Current 1,950,727 2,482,768 4,537,051 5,217,768
Deferred (620,157) (162,691) (1,160,264) (542,050)
------------ ------------ ------------- -------------
Total income taxes 1,330,570 2,320,077 3,376,787 4,675,718
------------ ------------ ------------- -------------
NET INCOME $ 11,197,255 $ 9,578,393 $ 21,762,275 $ 18,593,288
============ ============ ============= =============
NET INCOME ATTRIBUTABLE TO COMMON
STOCKHOLDERS $ 9,747,718 $ 8,715,802 $ 18,863,197 $ 17,187,861
============ ============ ============= =============
BASIC AND DILUTED EARNINGS PER
COMMON SHARE (Note 2) $ 0.23 $ 0.21 $ 0.45 $ 0.41
============ ============ ============= =============
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE> 5
W HOLDING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AND OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------------------
2000 1999
------------- -------------
<S> <C> <C>
Changes in Stockholders' Equity:
Preferred stock:
Balance at beginning of period $ 3,220,000 $ 1,219,000
Issuance of preferred stock -- 2,001,000
------------- -------------
Balance at end of period 3,220,000 3,220,000
------------- -------------
Common stock:
Balance at beginning of period 42,000,000 42,080,309
Purchase and retirement of common stock (439,800) (80,309)
------------- -------------
Balance at end of period 41,560,200 42,000,000
------------- -------------
Paid-in-capital:
Balance at beginning of period 99,595,597 54,465,556
Issuance of preferred stock -- 46,237,082
Purchase and retirement of common stock (3,756,606) (1,141,791)
------------- -------------
Balance at end of period 95,838,991 99,560,847
------------- -------------
Reserve fund:
Balance at beginning of period 12,843,183 9,130,767
Transfer from undivided profits 2,176,228 1,859,329
------------- -------------
Balance at end of period 15,019,411 10,990,096
------------- -------------
Undivided profits:
Balance at beginning of period 67,218,342 47,358,549
Net income 21,762,275 18,593,288
Cash dividends on common stock (4,156,211) (5,884,819)
Cash dividends on preferred stock (2,899,078) (1,405,427)
Transfer to reserve fund (2,176,228) (1,859,329)
------------- -------------
Balance at end of period 79,749,100 56,802,262
------------- -------------
Accumulated other comprehensive income:
Balance at beginning of period (1,057,814) 28,226
Reclassification adjustment included in net income 422,269 (28,226)
Net decrease in fair value of securities available for
sale, net of taxes (29,202) (1,007,846)
------------- -------------
Balance at end of period (664,747) (1,007,846)
------------- -------------
Total Stockholders' Equity $ 234,722,955 $ 211,565,359
============= =============
Comprehensive income:
Net income $ 21,762,275 $ 18,593,288
------------- -------------
Other comprehensive income (loss), net of taxes:
Unrealized net losses on securities available
for sale arising during the period (29,202) (1,007,846)
Reclassification adjustment included in net income 422,269 (28,226)
------------- -------------
Net change in fair value of securities available for sale,
net of taxes 393,067 (1,036,072)
------------- -------------
Total Comprehensive Income $ 22,155,342 $ 17,557,216
============= =============
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE> 6
W HOLDING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------------------
2000 1999
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 21,762,275 $ 18,593,288
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision (credit) for:
Loan losses 4,000,000 3,500,000
Deferred income taxes (1,160,264) (542,050)
Depreciation and amortization on:
Premises and equipment 3,089,854 2,452,702
Foreclosed real estate held for sale 28,366 42,783
Mortgage servicing rights 165,577 143,213
Amortization of premium (discount) on:
Investment securities available for sale 5,152 2,210
Investment securities held to maturity (6,239,034) (3,498,997)
Mortgage-backed securities held to maturity (24,044) 28,836
Loans 299,259 319,604
Amortization of excess of cost over net assets acquired 31,498 281,712
Amortization of deferred loan origination fees and costs (1,974,550) (2,255,923)
Net loss (gain) on sale and in valuation of:
Investment securities available for sale 422,269 106,401
Mortgage loans held for sale 26,056 81,776
Foreclosed real estate held for sale (56,785) 37,297
Originations of mortgage loans held for sale (22,705,934) (29,821,470)
Decrease (increase) in:
Trading securities 21,818,027 31,198,547
Accrued interest receivable (2,141,027) (7,256,157)
Other assets (3,943,717) (2,559,561)
Increase (decrease) in:
Accrued interest on deposits and borrowings 3,514,255 3,830,475
Other liabilities (1,141,438) 1,964,180
--------------- ---------------
Net cash provided by operating activities 15,775,795 16,648,866
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease (increase) in interest bearing deposits with banks 670,123 (5,028,073)
Net decrease in federal funds sold and securities purchased under
agreements to resell 6,697,598 536,801
Investment securities available for sale:
Purchases -- (50,556,426)
Proceeds from sales 3,552,028 45,737,519
Proceeds from principal repayment 700,279 156,985
Investment securities held to maturity:
Purchases (1,357,428,068) (1,428,335,862)
Proceeds from redemption and repayment 1,271,512,478 1,163,120,861
Mortgage-backed securities held to maturity:
Purchases (32,060,673) --
Proceeds from principal repayment 7,810,694 26,448,033
Loans:
Purchases (111,165,193) (276,497,716)
Other decrease (increase) 12,316,962 (138,774,996)
Proceeds from sales of foreclosed real estate held for sale 142,302 --
Additions to premises and equipment (4,598,628) (5,713,725)
Purchase of Federal Home Loan Bank stock (2,756,400) (3,612,300)
Business acquisition -- (107,651)
Net cash used in investing activities (204,606,498) (672,626,550)
--------------- ---------------
Forward $ (188,830,703) $ (655,977,684)
=============== ===============
</TABLE>
(Continued)
4
<PAGE> 7
W HOLDING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------------------
2000 1999
------------- -------------
<S> <C> <C>
Forward $(188,830,703) $(655,977,684)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 91,877,152 379,725,933
Net increase in securities sold under agreements to repurchase 55,766,830 152,000,250
Securities sold under agreements to repurchase with original maturities over
three months:
Proceeds 694,487,000 103,033,000
Payments (698,396,760) (61,531,000)
Advance from Federal Home Loan Bank:
Proceeds 50,000,000 29,000,000
Net increase (decrease) in advances from borrowers for taxes
and insurance (17,137) 165,673
Repurchase of common stock for retirement (4,196,406) (1,222,100)
Dividends paid (9,722,620) (3,610,490)
Issuance of preferred stock -- 48,238,082
------------- -------------
Net cash provided by financing activities 179,798,059 645,799,348
------------- -------------
NET DECREASE IN CASH AND DUE FROM BANKS (9,032,643) (10,178,336)
CASH AND DUE FROM BANKS, BEGINNING OF PERIOD 55,671,999 49,429,206
------------- -------------
CASH AND DUE FROM BANKS, END OF PERIOD $ 46,639,356 $ 39,250,870
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest on deposits and other borrowings $ 82,239,145 $ 53,915,395
Income taxes 8,400,000 5,000,000
Noncash activities:
Accrued dividends payable 936,259 3,770,228
Net increase (decrease) in unrealized loss on investment securities
available for sale (393,067) 1,036,072
Mortgage loans securitized and transferred to trading securities 21,724,277 33,248,737
Transfer from loans to foreclosed real estate held for sale 484,520 186,522
Mortgage loans originated to finance the sale of foreclosed real estate
held for sale 185,370 598,000
Capitalized mortgage servicing rights 243,919 420,870
</TABLE>
See Notes to Consolidated Financial Statements.
(Concluded)
5
<PAGE> 8
W HOLDING COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
W Holding Company, Inc. (the "Company") is a bank holding company offering a
full range of financial services through its wholly owned subsidiary,
Westernbank Puerto Rico ("Westernbank"). The Company was organized under the
laws of the Commonwealth of Puerto Rico in February 1999. Effective November 30,
1999, pursuant to a resolution approved by the stockholders and after receiving
all pertinent regulatory approvals, a reorganization was effected as a result of
which the Company became the sole shareholder of Westernbank. Westernbank is a
commercial bank chartered under the laws of the Commonwealth of Puerto Rico.
Since its inception, the Company had no operations other than those resulting
from its investment in Westernbank and the repurchase, retirement and payment of
dividends on its common and preferred stocks. The Company's executive office is
located at 19 West McKinley Street, Mayaguez, Puerto Rico; its telephone number
is (787) 834-8000; its internet email address is [email protected]; and its
web page is at URL:http: //www.wbpr.com.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with instructions for Form 10-Q. Complete information regarding
the financial statements can be found in the notes to the financial statements
for the year ended December 31, 1999 contained in the Company's 1999 Annual
Report.
In management's opinion, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting mainly of normal recurring
adjustments) necessary to present fairly, in all material respects, the
Company's financial condition as of June 30, 2000 and December 31, 1999, and the
results of its operations, changes in stockholders' equity and of comprehensive
income and its cash flows for the three and six months ended June 30, 2000 and
1999. The results of operations for the six months ended June 30, 2000, are not
necessarily indicative of the results to be expected for the entire year.
On July 14, 2000, the Company's election to become a financial holding company
under the Bank Holding Company Act was approved by the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board"). As a financial holding
company, the Company may engage in the expanded activities permitted under the
Gramm-Leach-Bliley Act passed in 1999, including expanded insurance and
securities activities, provided that all depository institutions the Company
controls remain well-capitalized, well-managed and has a satisfactory Community
Reinvestment Act (CRA) rating. Also, no prior notice to the Federal Reserve
Board is required from a financial holding company to acquire a company engaging
in permissible nonbanking activities or to commence these activities directly or
indirectly through a subsidiary.
2. EARNINGS PER SHARE AND CAPITAL TRANSACTIONS
Basic and diluted earnings per common share for the three and six months ended
June 30, 2000, were computed by dividing the income attributable to common
stockholders for such periods by the weighted average number of shares of common
stock outstanding during such periods (41,562,247 and 41,740,313 shares,
respectively).
Basic and diluted earnings per common share for the three and six months ended
June 30, 1999, were computed by dividing the income attributable to common
stockholders for such periods by the weighted average number of shares of common
stock outstanding during such periods (42,000,000 and 42,024,877 shares,
respectively).
6
<PAGE> 9
During the six months ended June 30, 2000, the Company acquired and retired
439,800 shares of common stock for $4,196,406.
3. DIVIDENDS DECLARED PER SHARE
On February 3, 2000, the Board of Directors approved an increase on its annual
dividend payments to common shareholders in 2000 to $0.20 per share. This
represents an increase of 25% over the dividends paid the previous year. The
increase is the result of the guidelines established by the Board of Directors,
which provides for distribution of dividends to stockholders on the basis of 25%
of the average earnings for the last two years.
On March 7, 2000 the Board of Directors adopted the policy of paying dividends
on a monthly basis. The first dividend payment under this new policy was paid on
April 17, 2000 and covered retroactive dividends for the first three months
ended March 31, 2000. Thereafter, dividends are being paid on the 15th day of
the next month for stockholders of record as of the last day of the previous
month.
The Company's cash dividends per share declared for the first semester of 2000
and 1999 were as follows:
<TABLE>
<CAPTION>
RECORD DATE PAYABLE DATE AMOUNT PER SHARE
----------- ------------ ----------------
<S> <C> <C>
YEAR 2000
March 31, 2000 April 17, 2000 $ 0.05
April 30, 2000 May 15, 2000 0.0167
May 31, 2000 June 15, 2000 0.0167
June 30, 2000 July 15, 2000 0.0166
---------
Total $ 0.10
=========
YEAR 1999
June 30, 1999 July 15, 1999 $ 0.08
=========
</TABLE>
7
<PAGE> 10
4. INVESTMENT SECURITIES
The amortized cost, gross unrealized gains and losses and fair value of
investment securities were as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------------- ---------- ----------- --------------
<S> <C> <C> <C> <C>
JUNE 30, 2000
TRADING SECURITIES:
Mortgage-backed securities-
Government National Mortgage
Association (GNMA) certificates $ 1,175,985 $ 19,688 $ 235 $ 1,195,438
============== ======== =========== ==============
AVAILABLE FOR SALE:
Mortgage-backed securities-GNMA
certificates $ 18,660,568 $ -- $ 664,747 $ 17,995,821
============== ======== =========== ==============
HELD TO MATURITY:
U.S. Government and agencies
obligations $1,092,875,244 $ 2,827 $90,456,071 $1,002,422,000
Puerto Rico Government and
agencies obligations 16,516,642 151,379 75,021 16,593,000
Other investments 46,046,282 53,296 1,894,578 44,205,000
-------------- -------- ----------- --------------
Total 1,155,438,168 207,502 92,425,670 1,063,220,000
-------------- -------- ----------- --------------
Mortgage and other asset-backed securities:
Federal Home Loan Mortgage
Corporation (FHLMC) certificates 19,007,742 99,743 487,485 18,620,000
GNMA certificates 25,221,418 179,340 149,758 25,251,000
Federal National Mortgage Association
(FNMA) certificates 13,496,602 44,091 313,693 13,227,000
Collateralized mortgage obligations
(CMO) certificates 57,746,693 17,139 504,832 57,259,000
Other 20,050,317 -- 280,317 19,770,000
-------------- -------- ----------- --------------
Total 135,522,772 340,313 1,736,085 134,127,000
-------------- -------- ----------- --------------
Total $1,290,960,940 $547,815 $94,161,755 $1,197,347,000
============== ======== =========== ==============
</TABLE>
8
<PAGE> 11
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 1999 COST GAINS LOSSES VALUE
-------------- ---------- ------------ --------------
<S> <C> <C> <C> <C>
TRADING SECURITIES:
Mortgage backed securities -
GNMA certificates $ 1,250,732 $ 38,456 $ -- $ 1,289,188
============== ======== ============ ==============
AVAILABLE FOR SALE:
Mortgage backed securities -
GNMA certificates $ 19,294,234 $ -- $ 766,689 $ 18,527,545
FNMA certificates 4,046,062 -- 388,166 3,657,896
-------------- -------- ------------ --------------
Total $ 23,340,296 $ -- $ 1,154,855 $ 22,185,441
============== ======== ============ ==============
HELD TO MATURITY:
U.S. Government and agencies obligations $1,029,449,708 $ 5,482 $ 97,335,190 $ 932,120,000
Puerto Rico Government and agencies
obligations 16,668,050 158,336 135,386 16,691,000
Other 17,165,787 -- 1,100,787 16,065,000
-------------- -------- ------------ --------------
Total 1,063,283,545 163,818 98,571,363 964,876,000
-------------- -------- ------------ --------------
Mortgage and other asset-backed securities:
FHLMC certificates 20,593,887 99,980 643,867 20,050,000
GNMA certificates 27,636,974 360,115 179,089 27,818,000
FNMA certificates 14,735,927 36,772 452,699 14,320,000
CMO certificates 28,106,621 5,554 722,175 27,390,000
Other 20,175,341 -- 283,341 19,892,000
-------------- -------- ------------ --------------
Total 111,248,750 502,421 2,281,171 109,470,000
-------------- -------- ------------ --------------
Total $1,174,532,295 $666,239 $100,852,534 $1,074,346,000
============== ======== ============ ==============
</TABLE>
The amortized cost and fair value of investment securities held to maturity at
June 30, 2000, by contractual maturity (excluding mortgage and asset-backed
securities) are shown below:
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
-------------- --------------
<S> <C> <C>
Due within one year $ 40,874,313 $ 40,873,000
Due after one year through five years 603,125 608,000
Due after five years through ten years 102,807,788 101,193,000
Due after ten years 1,011,152,942 920,546,000
-------------- --------------
Total 1,155,438,168 1,063,220,000
Mortgage and other asset-backed securities 135,522,772 134,127,000
-------------- --------------
Total $1,290,960,940 $1,197,347,000
============== ==============
</TABLE>
9
<PAGE> 12
5. LOANS
The loan portfolio consisted of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
--------------- ---------------
<S> <C> <C>
REAL ESTATE LOANS SECURED BY
FIRST MORTGAGES:
Conventional:
One-to-four family residences $ 682,147,493 $ 680,675,250
Other properties 2,121,319 2,388,015
Construction and land acquisition 118,256,009 111,451,452
Loans to facilitate the sale of foreclosed
real estate held for sale 752,749 757,218
Insured or guaranteed:
Federal Housing Administration and
Veterans Administration 21,129,473 21,250,880
Puerto Rico Housing Bank and Finance Agency 381,611 466,758
Commercial - collateralized by real estate 737,467,058 677,923,910
--------------- ---------------
Total 1,562,255,712 1,494,913,483
--------------- ---------------
Plus (less):
Undisbursed portion of loans in process (6,960,910) (8,762,838)
Premium on loans purchased - net 2,944,826 3,277,599
Deferred loan fees - net (4,508,392) (4,806,862)
--------------- ---------------
Total (8,524,476) (10,292,101)
--------------- ---------------
Real estate loans - net 1,553,731,236 1,484,621,382
--------------- ---------------
OTHER LOANS:
Commercial loans 86,776,975 80,483,612
Loans on deposits 36,415,857 35,264,574
Installment loans:
Credit cards 36,531,002 35,305,985
Other consumer loans 280,285,392 258,926,538
Less:
Unearned interest (37,944) (64,607)
Deferred loan fees - net (927,609) (890,862)
--------------- ---------------
Other loans - net 439,043,673 409,025,240
--------------- ---------------
TOTAL LOANS 1,992,774,909 1,893,646,622
ALLOWANCE FOR LOAN LOSSES (26,882,364) (23,978,449)
--------------- ---------------
LOANS - NET $ 1,965,892,545 $ 1,869,668,173
=============== ===============
</TABLE>
10
<PAGE> 13
The total investment on impaired commercial and constructions loans at June 30,
2000 and December 31, 1999, was $13,546,000 and $13,083,000, respectively. All
impaired commercial and constructions loans were measured based on the fair
value of collateral at June 30, 2000 and December 31, 1999. Impaired commercial
and construction loans amounting to $8,706,000 and $8,136,000 at June 30, 2000
and December 31, 1999, respectively, were covered by a valuation allowance of
$1,359,000 and $1,268,000, respectively. Impaired commercial and construction
loans amounting to $4,840,000 at June 30, 2000, and $4,947,000 at December 31,
1999 did not require a valuation allowance in accordance with Statement of
Financial Accounting Standards No. 114, ACCOUNTING BY CREDITORS FOR IMPAIRMENT
OF A LOAN. The average investment on impaired commercial and construction loans
at June 30, 2000 and 1999 amounted to $13,055,000 and $8,141,000, respectively.
The Company's policy is to recognize interest income related to impaired loans
on a cash basis. Interest on impaired commercial and construction loans
collected and recognized as income for the periods ended June 30, 2000 and 1999,
amounted to $450,596 and $176,700, respectively.
6. DEPOSITS
A comparative summary of deposits as of June 30, 2000 and December 31, 1999
follows:
<TABLE>
<CAPTION>
2000 1999
-------------- --------------
<S> <C> <C>
Noninterest bearing accounts $ 100,337,115 $ 103,681,889
Passbook 413,620,164 409,422,925
NOW, Super NOW and other money market accounts 109,633,216 105,400,121
Certificates of deposit 1,698,627,842 1,610,892,826
-------------- --------------
Total 2,322,218,337 2,229,397,761
Accrued interest payable 21,249,351 18,467,046
-------------- --------------
Total $2,343,467,688 $2,247,864,807
============== ==============
</TABLE>
7. INCOME TAXES
Under the Puerto Rico Internal Revenue Code, all companies are treated as
separate taxable entities and are not entitled to file consolidated tax returns.
The Company and Westernbank are subject to Puerto Rico regular income tax or
alternative minimum tax (AMT) on income earned from all sources. The AMT is
payable if it exceeds regular income tax. The excess of AMT over regular income
tax paid in any one year may be used to offset regular income tax in future
years, subject to certain limitations.
The income on certain investments is exempt for income tax purposes. Also,
activities relating to the Westernbank International division are exempt for
income tax purposes. As a result of the above, the Company's effective tax rate
is substantially below the statutory rate.
11
<PAGE> 14
Deferred income tax assets (liabilities) as of June 30, 2000 and December 31,
1999, consisted of the following:
<TABLE>
<CAPTION>
2000 1999
------------ -----------
<S> <C> <C>
Allowance for loan losses $ 10,484,122 $ 9,352,000
Loss carryforward relating to sale of securities 38,734 136,000
Allowance for foreclosed real estate held for sale 69,574 75,000
Mortgage servicing rights (802,404) (772,000)
Other temporary differences (34,112) (98,308)
------------ -----------
Total 9,755,914 8,692,692
Less valuation allowance 39,000 39,000
------------ -----------
Deferred income tax assets, net $ 9,716,914 $ 8,653,692
============ ===========
</TABLE>
Realization of deferred tax assets is dependent on generating sufficient future
taxable income. The amount of the deferred tax asset considered realizable,
however, could be reduced in the near term if estimates of future taxable income
are not met.
8. FINANCIAL INSTRUMENTS
DERIVATIVE FINANCIAL INSTRUMENTS DESIGNATED AS HEDGES - As part of the Company's
asset/liability management, the Company uses interest-rate contracts, which
include interest-rate exchange agreements (swaps), to hedge various exposures or
to modify interest rate characteristics of various statement of financial
condition accounts. Derivatives that are used as part of the asset/liability
management process are linked to specific assets or liabilities and have high
correlation between the contract and the underlying item being hedged, both at
the inception and throughout the hedge period. The derivative instruments, such
as interest-rate swaps, that meet the preceding qualifications are accounted for
using the accrual method. Net interest income (expense) resulting from the
differential between exchanging floating and fixed-rate interest payments is
recorded on a current basis. Gains or losses on the sale of swaps used in
asset/liability management activities are deferred and amortized into interest
income or expense over the maturity period of the swap. As of June 30, 2000 and
December 31, 1999, the Company had outstanding interest swap agreements with
other financial institutions, used to hedge the interest rate risk on $71.0
million term notes bearing variable rates; $516.0 million and $438.5 million,
respectively, fixed rate certificates of deposit liabilities, and $50.0 million
fixed rate advances from Federal Home Loan Bank in 2000. Also, at June 30, 2000,
the Company had outstanding option agreements on $250.0 million variable reverse
repurchase agreements to cap its interest rate risk. No such agreements were
outstanding at December 31, 1999.
OTHER DERIVATIVE FINANCIAL INSTRUMENTS - Those contracts, such as interest rate
options, that do not meet the hedging criteria above are classified as trading
activities and are recorded at fair value with changes in fair value recorded as
earnings.
Interest rate options, which include caps, are contracts that transfer, modify,
or reduce interest rate risk in exchange for the payment of a premium when the
contract is initiated. The Company pays a premium for the right, but not the
obligation, to buy or sell a financial instrument at predetermined terms in the
future. The credit risk inherent in options is the risk that the exchange party
may default. At June 30, 2000, the Company had outstanding cap agreements with
other financial institution amounting to $100.0 million. No such agreements were
outstanding at December 31, 1999.
12
<PAGE> 15
Other off-balance-sheet instruments. In the ordinary course of business the
Company has entered into off-balance-sheet financial instruments consisting of
commitments to extend credit, commitments under credit-card arrangements,
commercial letters of credit, and standby letters of credit. Such financial
instruments are recorded in the financial statements when they are funded or
related fees are incurred or received.
Committed Resources. At June 30, 2000 and December 31, 1999, the Company had
outstanding the following contract amount of financial instruments whose amount
represent credit risk:
<TABLE>
<CAPTION>
2000 1999
------------- -------------
<S> <C> <C>
Commitments to extend credit:
Fixed rates $ 13,731,000 $ 15,302,000
Variable rates 81,149,000 159,328,000
Unused lines of credit:
Commercial 37,485,000 36,998,000
Credit cards and other 51,406,000 45,856,000
Stand-by letters of credit 768,000 2,373,000
------------- -------------
Total $ 184,539,000 $ 259,857,000
============= =============
</TABLE>
Such commitments will be funded in the normal course of business from the
Company's principal sources of funds. At June 30, 2000, the Company had $1.01
billion of deposits that mature during the following twelve months. The Company
does not anticipate any difficulty in retaining such deposits. The Company also
has on-going commitments to repay borrowings, fund maturing certificates of
deposit and meet obligations under long-term operating leases for certain
branches. No material changes are anticipated in regard to such commitments.
9. STOCK OPTION PLANS
The Company has two stock option plans, the 1999 Qualified Stock Option Plan
(the "1999 Qualified Option Plan") and the 1999 Nonqualified Stock Option Plan
(the "1999 Nonqualified Option Plan") for the benefit of employees of the
Company and its subsidiaries. These plans offer to key officers, directors and
employees an opportunity to purchase shares of the Company's common stock.
Under the 1999 Qualified Option Plan, options for up to 4,200,000 shares of
common stock can be granted. Also, options for up to 4,200,000 shares of common
stock, reduced by any share issued under the 1999 Qualified Option Plan can be
granted under the 1999 Nonqualified Option Plan. The option price for both is
determined at the grant date. Both plans will remain in effect for a term of 10
years. The Board of Directors has sole authority and absolute discretion as to
the number of stock options to be granted, their vesting rights, and the
options' exercise price. The Plans provide for a proportionate adjustment in
the exercise price and the number of shares that can be purchased in the event
of a stock split, reclassification of stock and a merger or a reorganization.
During the first semester of 2000, the Company granted 2,200,000 options under
the 1999 Qualified Stock Option Plan to five executive officers, which will
become exercisable after five years following the grant date.
13
<PAGE> 16
The Company follows the intrinsic value-based method of accounting for
measuring compensation expense, if any. Compensation expense is generally
recognized for any excess of the quoted market price of the Company's stock at
the measurement date (the grant date) over the amount an employee must pay to
acquire the stock. No compensation expense was recognized in the quarter nor
the six months ended June 30, 2000, because the price of the stock at the grant
date was lower than the exercise price of the options. The compensation expense
for the period ended June 30, 2000, based on the Fair Value Method described in
SFAS No. 123 and its effect on earnings per share was not significant.
10. SEGMENT INFORMATION
The Company's management monitors and manages the financial performance of two
primary business segments, the operations of Westernbank Puerto Rico and those
of the division known as Westernbank International. The accounting policies of
the segments are the same as those described in the summary of significant
accounting policies included in the Company's 1999 Annual Report. The Company
evaluates performance based on net income or loss. Inter-segment sales and
transfers, if any, are accounted for as if the sales or transfers were to third
parties, that is, at current market prices.
The financial information presented below was derived from the internal
management accounting system and is based on internal management accounting
policies. The information presented does not necessarily represent each
segment's financial condition and results of operations as if they were
independent entities.
<TABLE>
<CAPTION>
As of and for the six months ended
June 30, 2000
(In Thousands)
-------------------------------------------------------
In Puerto Rico International Total
<S> <C> <C> <C>
Operations data:
Interest income $ 116,685 $ 16,885 $ 133,570
Interest expense 72,124 12,666 84,790
------------- ----------- -------------
Net interest income 44,561 4,219 48,780
Provision for loan losses (4,000) -- (4,000)
Other income, net 6,232 9 6,241
Equity in loss of subsidiary (102) -- (102)
Operating expenses (25,683) (96) (25,779)
Provision for income taxes (3,378) -- (3,378)
------------- ----------- -------------
Net income $ 17,630 $ 4,132 $ 21,762
============= =========== =============
Total assets $ 3,366,007 $ 569,549 $ 3,935,556
============= =========== =============
</TABLE>
14
<PAGE> 17
<TABLE>
<CAPTION>
As of December 31, 1999 and for the six months
ended June 30, 1999
(In Thousands)
In Puerto Rico International Total
<S> <C> <C> <C>
Operations data:
Interest income $ 90,973 $ 14,196 $ 105,169
Interest expense 47,461 10,285 57,746
------------- ----------- -------------
Net interest income 43,512 3,911 47,423
Provision for loan losses (3,500) -- (3,500)
Other income, net 5,838 118 5,956
Intersegment revenue -- 19 19
Intersegment expense (19) -- (19)
Equity in loss of subsidiary (241) -- (241)
Operating expenses (26,254) (115) (26,369)
Provision for income taxes (4,676) -- (4,676)
------------- ----------- -------------
Net income $ 14,660 $ 3,933 $ 18,593
============= =========== =============
</TABLE>
<TABLE>
<CAPTION>
Six months ended
June 30,
2000 1999
---------- ----------
(In Thousands)
<S> <C> <C>
Consolidated interest income $ 133,570 $ 105,169
========== ==========
Net income:
Reportable segments $ 21,762 $ 18,593
All other 21,660 (250)
---------- ----------
Total 43,422 18,343
Plus eliminations (21,660) 250
---------- ----------
Consolidated net income $ 21,762 $ 18,593
========== ==========
</TABLE>
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------- -----------------
<S> <C> <C>
Total assets:
Reportable segments $ 3,935,556 $ 3,374,782
All other 236,642 228,499
------------- -------------
Total 4,172,198 3,603,281
Less eliminations (593,701) (228,710)
------------- -------------
Consolidated total assets $ 3,578,497 $ 3,374,571
============= =============
</TABLE>
15
<PAGE> 18
11. RECENT ACCOUNTING DEVELOPMENTS
In December 1999, the Securities and Exchange Commission (the "Commission")
released Staff Accounting Bulletin No. 101, REVENUE RECOGNITION IN FINANCIAL
STATEMENTS ("SAB 101"). SAB 101 provides guidance on the recognition,
presentation, and disclosure of revenue in financial statements filed with the
Commission. It does not change any of the accounting profession's existing
rules on revenue recognition. Instead, it draws upon existing rules and
explains how the staff applies those rules, by analogy, to other transactions
that existing rules do not specifically address. The recurring revenue
recognition themes found throughout the existing accounting rules are used in
SAB 101 to provide the criteria registrants must meet before revenue may be
recognized.
SAB 101 provides a number of examples of how the staff applies these criteria
to specific fact patterns such as bill-and-hold transactions, up-front fees
when the seller has significant continuing involvement, long-term service
transactions, refundable membership fees, and contingent rental income. It also
addresses whether revenue should be presented on a fee or contingent basis or
at the full transaction amount when the seller is acting as a sales agent or
similar capacity. SAB 101 provides guidance on the disclosure registrants
should make about their revenue recognition policies and the impact of events
and trends on revenue. The adoption of SAB 101 did not have a significant
effect on the Company's financial position or results of operations.
In June 1998, the Financial Accounting Standard Board issued Statement No. 133,
ACCOUNTING FOR DERIVATIVES AND SIMILAR FINANCIAL INSTRUMENTS AND FOR HEDGING
ACTIVITIES ("SFAS 133"). SFAS 133 was amended by SFAS 138, ACCOUNTING FOR
CERTAIN DERIVATIVE INSTRUMENTS AND CERTAIN HEDGING ACTIVITIES ("SFAS 138")
issued in June 2000. SFAS 133 and SFAS 138 establish accounting and reporting
standards for derivative financial instruments and for hedging activities and
require all derivatives to be measured at fair value and to be recognized as
either assets or liabilities in the statement of financial condition. The
Statements also require that derivatives used in hedging activities to be
designated into one of the following categories: (a) fair value hedge; (b) cash
flow hedge; and (c) foreign currency exposure hedge. The changes in fair value
(that is, gains and losses) will be either recognized as part of earnings in
the period when the change occurs or as a component of other comprehensive
income (outside earnings) depending on their intended use and resulting
designation. SFAS 133 and SFAS 138 become effective for all fiscal years
beginning after June 15, 2000, pursuant to Statements of Financial Accounting
Standards (SFAS) No. 137 and 138, Deferral of the Effective Date of SFAS 133.
The effect of implementing these statements on the Company's financial
condition and results of operations has not been determined.
16
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Part I - Item 2
GENERAL
W Holding Company, Inc. (the "Company") is a bank holding company offering a
full range of financial services through its wholly owned subsidiary,
Westernbank Puerto Rico ("Westernbank"). The Company was organized under the
laws of the Commonwealth of Puerto Rico in February 1999. Effective November
30, 1999, pursuant to a resolution approved by the stockholders and after
receiving all pertinent regulatory approvals, a reorganization was effected as
a result of which the Company became the sole shareholder of Westernbank Puerto
Rico. Since its inception, the Company had no operations other than those
resulting from its investment in Westernbank and the repurchase of common stock
for retirement. The Company's executive office is located at 19 West McKinley
Street, Mayaguez, Puerto Rico; its telephone number is (787) 834-8000; its
internet email address is [email protected]; and its web page is at
URL:http: //www.wbpr.com.
Westernbank is a commercial bank chartered under the laws of the Commonwealth
of Puerto Rico effective November 30, 1994. Originally, Westernbank was
organized as a federally chartered mutual savings and loan association in 1958,
and in January 1984 it became a federal mutual savings bank. In February 1985,
the savings bank was converted to the stock form of ownership. Westernbank,
provides a variety of banking services to individuals and businesses through
its 33 service branches, 24 of which are located in the Western region, 2 in
the Metropolitan Area, 4 in the Northeastern region, and 3 in the Southern
region of Puerto Rico, including one regional office. Its primary deposit
products are passbook accounts, certificates of deposit, and demand deposits,
and its primary lending products are real estate mortgage, commercial business,
and installment loans. Westernbank operates a division known as Westernbank
International, which offers commercial banking and related services outside of
Puerto Rico. In February 1998, Westernbank acquired 80% of the voting shares of
SRG, Inc., a Puerto Rico corporation that operates a shared electronic funds
transfer network. In March 1999, Westernbank acquired the remaining 20% of the
voting shares of SRG Net, Inc. The assets, liabilities, revenues and expenses
of the subsidiary at June 30, 2000 and December 31, 1999, and for the three and
six months ended June 30, 2000 and 1999, are not significant.
The principal business of the Company consists of attracting deposits from the
general public and utilizing such funds and proceeds from reverse repurchase
agreements and other borrowings to invest in residential mortgage loans,
commercial loans collateralized with real estate, consumer loans and other
loans.
The Company is subject to examination, regulation and periodic reporting under
the Bank Holding Company Act of 1956, as amended, which is administered by the
Board of Governors of the Federal Reserve System (the "Federal Reserve Board").
Westernbank is subject to examination and comprehensive regulation by the
Puerto Rico Department of the Treasury, the Puerto Rico Commissioner of
Financial Institutions and the Federal Deposit Insurance Corporation ("FDIC").
In addition, Westernbank is subject to the regulations of the Puerto Rico
Regulatory Financial Board with respect to rates and fees charged on certain
loans to individuals. Westernbank is a member of the Federal Home Loan Bank
("FHLB") of New York, which is one of the twelve regional banks comprising the
Federal Home Loan Bank System ("FHLB System"). Deposits with Westernbank are
insured to the maximum extent provided by law through the Savings Association
Insurance Fund ("SAIF") and the Bank Insurance Fund ("BIF") which are
administered by the FDIC.
17
<PAGE> 20
On July 14, 2000, the Company's election to become a financial holding company
under the Bank Holding Company Act was approved by the Federal Reserve Board.
As a financial holding company, the Company may engage in the expanded
activities permitted under the Gramm-Leach-Bliley Act passed in 1999, including
expanded insurance and securities activities, provided that all depository
institutions the Company controls remain well-capitalized, well-managed and has
a satisfactory Community Reinvestment Act (CRA) rating. Also, no prior notice
to the Federal Reserve Board is required from a financial holding company to
acquire a company engaging in permissible nonbanking activities or to commence
these activities directly or indirectly through a subsidiary.
OVERVIEW
This financial discussion contains an analysis of the consolidated financial
position and financial performance of W Holding Company, Inc. and its wholly
owned subsidiary, Westernbank Puerto Rico.
The Company's principal source of earnings is its net interest income. This is
the difference between interest income on loans and mortgage-backed securities,
investments, and other assets ("interest-earning assets") and its interest
expense on deposits and borrowings, including reverse repurchase agreements,
term notes and advances from the FHLB ("interest-bearing liabilities"). Loan
origination and commitments fees, net of related costs, are deferred and
amortized over the life of the related loans as a yield adjustment. Gains or
losses on the sale of loans and investments and service charges, fees and other
income, also affect income. The Company's net income is also affected by the
level of its non-interest expenses, such as compensation, employees' benefits,
occupancy costs and other operating expenses.
The main objective of the Company's Asset and Liability Management program is
to invest funds judiciously and reduce interest rate risks while optimizing net
income and maintaining adequate liquidity levels. As further discussed in
Section Item 3; the "Quantitative and Qualitative Disclosures About Market
Risk", the Company uses several tools to manage the risks associated with the
composition and repricing of assets and liabilities. Therefore, management has
followed a conservative practice inclined towards the preservation of capital
with adequate returns. The Investment Committee, which includes the Board of
Directors and senior management, is responsible for the asset-liability
oversight. The Investment Department is responsible for implementing the
policies established by the Investment Committee.
The policies generated and practices followed are intended to retain
depositors' confidence, obtain a favorable match between the maturity of its
interest-earning assets and its interest-bearing liabilities, and enhance the
stockholders' investment in the Company.
The Company's 2000 growth is mainly related to an increase in its commercial
real estate loans and the portfolio of investment securities held to maturity,
continued effective management of interest rate risk and a tight control of
operating expenses. Total net income for the three and six months ended June
30, 2000, increased to $11.2 million and to $21.8 million, respectively, up
16.90% and 17.04% when compared to $9.6 million and $18.6 million for the three
and six months ended June 30, 1999, respectively, while net income attributable
to common stockholders for the three and six months ended June 30, 2000
increased to $9.7 million and $18.9 million, respectively, up 11.84% and 9.75%
when compared to $8.7 million and $17.2 million, respectively, for the same
periods in 1999. The Company's profitability ratios for the six months ended
June 30, 2000, represented returns of 1.25% on assets (ROA) and 25.36% on
common stockholders' equity (ROE), compared with a ROA and a ROE of 1.32% and
26.97%, respectively, for the same period in 1999.
Different components that impacted the Company's performance are discussed in
detail in the following pages.
18
<PAGE> 21
FINANCIAL CONDITION
The Company had total assets of $3.58 billion compared to $3.37 billion as of
June 30, 2000 and December 31, 1999, respectively; an increase of $203.9
million or 6.04%. As of June 30, 2000, total liabilities amounted to $3.34
billion, an increase of $193.0 million or 6.13% when compared to $3.15 billion
as of December 31, 1999.
INTEREST-EARNING ASSETS
Interest-earning assets amounted to $3.43 billion at June 30, 2000, an increase
of $204.5 million or 6.33% when compared to $3.23 billion as of December 31,
1999.
The Company has continued its emphasis in the credit granting activity. As a
result, the commercial real-estate loan portfolio increased from $677.9 million
as of December 31, 1999, to $737.5 million as of June 30, 2000, an increase of
$59.5 million or 8.78% during the first six months ended June 30, 2000. The
consumer loan portfolio (including credit cards), commercial loans (not
collateralized by real estate) and other loans increased from $409.0 million as
of December 31, 1999, to $439.0 million as of June 30, 2000, an increase of
$30.0 million or 7.34%.
Federal funds sold and securities purchased under agreements to resell
("repurchase agreements") decreased from $137.1 million as of December 31,
1999, to $130.4 million as of June 30, 2000, a decrease of $6.7 million or
4.89%. Investment securities held to maturity, which principally include United
States and Puerto Rico Government and agencies obligations and mortgage and
other asset-backed securities increased from $1.17 billion as of December 31,
1999, to $1.29 billion as of June 30, 2000, an increase of $116.4 million or
9.91%. Investments available for sale decreased from $22.2 million as of
December 31, 1999, to $18.0 million as of June 30, 2000, a decrease of $4.2
million or 18.88%.
INTEREST-BEARING LIABILITIES
Interest-bearing liabilities amounted to $3.30 billion at June 30, 2000, an
increase of $194.7 million or 6.26% when compared to $3.11 billion as of
December 31, 1999.
The increase during the six months ended June 30, 2000, was mainly due to an
increase of $92.8 million in deposits (excluding accrued interest payable),
$51.9 million in securities sold under agreements to repurchase ("reverse
repurchase agreements"), and $50.0 million in advances from Federal Home Loan
Bank.
The Company offers a variety of specialized types of deposit accounts and
certificates of deposit. Savings deposits increased from $409.4 million as of
December 31, 1999, to $413.6 million as of June 30, 2000, an increase of $4.2
million or 1.03%. Also, other deposits (excluding accrued interest payable),
represented mainly by time deposits, increased from $1.82 billion as of
December 31, 1999, to $1.91 billion as of June 30, 2000, an increase of $88.6
million or 4.87%. Other deposits include brokered deposits amounting to $990.9
million and $894.8 as of June 30, 2000 and December 31, 1999, respectively.
19
<PAGE> 22
STOCKHOLDERS' EQUITY
As of June 30, 2000, total stockholders' equity amounted to $234.7 million, an
increase of $10.9 million or 4.87% when compared to $223.8 million as of
December 31, 1999. The increase during the first six months ended June 30,
2000, was mainly due to a net income of $21.8 million that was partially offset
by cash dividends declared on common and preferred stock of $7.1 million and
the repurchase and retirement of 439,800 shares of common stock for $4.2
million.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income decreased $1.1 million or 4.36% for the three months ended
June 30, 2000, and increased $1.4 million or 2.86% for the six months ended
June 30, 2000, when compared to the corresponding 1999 periods. The decrease
for the three months ended June 30, 2000, was primarily the result of increases
in interest expense on deposits and reverse repurchase agreements that offset
the increases in interest income from loans, investment securities and money
market instruments. The increase for the six months ended June 30, 2000, was
primarily the result of increases in interest income from loans and investment
securities, which was partially offset by increases in interest expense on
deposits and reverse repurchase agreements.
Average interest-earning assets increased from $2.79 billion for the three
months ended June 30, 1999, to $3.34 billion for the three months ended June
30, 2000, an increase of $554.0 million or 19.85%. For the six month period
average interest-earning assets increased from $2.69 billion in 1999 to $3.34
billion in 2000, an increase of $650.5 million or 24.20%, being the principal
reason for the increase in net interest income. The rise in average
interest-earning assets is mainly related to increases in average loans, which
is the higher yielding category of interest-earning assets, followed by a
significant increase in average investment securities.
Interest income on loans increased $7.8 million or 21.55% for the three months
ended June 30, 2000, as compared with the three months ended June 30, 1999. For
the six months ended June 30, 2000, interest income on loans increased $17.7
million or 25.79% as compared to the same period in 1999. Average loans
increased from $1.61 billion for the three months ended June 30, 1999, to $1.95
billion for the three months ended June 30, 2000, an increase of $345.0 million
or 21.49%. For the six month period the average loans increased from $1.55
billion in 1999 to $1.93 billion in 2000, an increase of $384.2 million or
24.80%. The increase was mainly attributed to an increase in commercial real
estate loans as a result of business growth experienced during 1999, and the
first half of the current year. In addition, purchases of mortgage loans
contributed to such increase. The average yield on loans increased from 9.09%
for the three months ended June 30, 1999, to 9.12% for the three months ended
June 30, 2000. For the six month period the average yield on loans increased
from 8.93% in 1999, to 8.98% in 2000.
20
<PAGE> 23
Interest income on investment securities increased $2.6 million or 15.85% for
the three months ended June 30, 2000, and $7.7 million or 25.50% for the six
months ended June 30, 2000, as compared to the corresponding periods in 1999.
Increase in income from investment securities is mainly related to a rise in
the average balance of investment securities from $976.0 million for the three
months ended June 30, 1999, to $1.14 billion for the three months ended June
30, 2000, an increase of $162.5 million or 16.65%. For the six month period the
average balance of investment securities increased from $921.4 million in 1999
to $1.1 billion in 2000, an increase of $223.6 million or 24.27%, however, the
investment portfolio average yield decreased from 6.71% for the three months
ended June 30, 1999, to 6.68% for the three months ended June 30, 2000. For the
six month period the average yield of investment securities increased from
6.62% in 1999 to 6.66% in 2000.
Interest income on mortgage and other asset-backed securities increased
$582,000 or 30.01% for the three months ended June 30, 2000, as compared to the
corresponding period in 1999. For the six months ended June 30, 2000, interest
income on mortgage-backed securities increased $920,000 or 23.16% as compared
to the same period in 1999. The increase in interest income was mainly the
result of an increase in the average yield of those securities. The average
yield on mortgage and other asset-backed securities increased from 7.15% for
the three months ended June 30, 1999, to 8.80% for the three months ended June
30, 2000. For the six month period the average yield on mortgage and other
asset-backed securities increased from 7.03% in 1999 to 8.67% in 2000.
Interest income on money market instruments increased $1.0 million or 94.09%
for the three months ended June 30, 2000, as compared to the corresponding
period in 1999. For the six months ended June 30, 2000, interest income on
money market instruments increased $2.1 million or 87.80% as compared to the
same period in 1999. Increase is mainly related to a rise in the average
balance of money market instruments from $100.1 million for the three months
ended June 30, 1999, to $140.1 million for the three months ended June 30,
2000, an increase of $40.0 million or 39.94%. For the six month period the
average balance of money market instruments increased from $103.0 million in
1999 to $146.2 million in 2000, an increase of $43.2 million or 41.90%. In
addition, the money market instruments average yield increased from 4.44% for
the three months ended June 30, 1999, to 6.17% for the three months ended June
30, 2000. For the six month period the average yield of money market
instruments increased from 4.63% in 1999 to 6.12% in 2000.
The increase in the average interest-earning assets was partially offset by the
increase in the average interest-bearing liabilities. Average interest bearing
liabilities increased from $2.69 billion for the three months ended June 30,
1999, to $3.19 billion for the three months ended June 30, 2000, an increase of
$502.5 million or 18.68%. For the six month period average interest bearing
liabilities increased from $2.60 billion in 1999 to $3.19 billion in 2000, an
increase of $594.9 million or 22.91%. In addition, average interest rates paid
on these liabilities during the three month period increased from 4.56% in 1999
to 5.51% in 2000. For the six month period average interest rates paid on these
liabilities increased from 4.49% in 1999 to 5.34% in 2000. The increase in
average interest-bearing liabilities was mainly related to an increase in
average deposits, followed by a significant increase in average reverse
repurchase agreements.
21
<PAGE> 24
Interest expense on deposits increased $7.8 million or 36.98% for the three
months ended June 30, 2000, and $17.7 million or 44.04% for the six months
ended June 30, 2000, as compared to the corresponding periods in 1999. The
increase was a combination of a rise in the average balance of deposits and an
increase in the average rate paid on them. The average balance of deposits
increased from $1.92 billion for the three months ended June 30, 1999, to $2.28
billion for the same period in 2000, an increase of $359.8 million or 18.77%.
For the six months the average balance of deposits increased from $1.9 billion
in 1999 to $2.3 billion in 2000, an increase of $431.0 million or 23.16%. The
average rate paid on deposits increased from 4.42% for the three months ended
June 30, 1999, to 5.11% for the three months ended June 30, 2000. For the six
month period the average rate paid on deposits increased from 4.35% in 1999 to
5.07% in 2000.
Interest expense on reverse repurchase agreements increased $4.0 million or
49.94% for the three months ended June 30, 2000, and $7.4 million or 50.41% for
the six months ended June 30, 2000, as compared to the corresponding periods in
1999. The increase is mainly related to a rise in the average rate paid on
reverse repurchase agreements. The average rate paid on reverse repurchase
agreements increased from 4.90% for the three months ended June 30, 1999, to
6.57% for the three months ended June 30, 2000. For the six months the average
rate paid on reverse repurchase agreements increased from 4.82% in 1999 to
6.14% in 2000. The average balance of reverse repurchase agreements increased
from $652.0 million for the three months ended June 30, 1999, to $730.7 million
for the same period in 2000, an increase of $78.6 million or 12.06%. For the
six month period the average balance of reverse repurchase agreements increased
from $617.0 million in 1999 to $726.9 million in 2000, an increase of $109.9
million or 17.81%.
Interest expense on term notes decreased $56,000 or 5.72% for the three months
ended June 30, 2000, and $81,000 or 4.09% for the six months ended June 30,
2000, as compared to the corresponding periods in 1999. The decrease was mainly
related to a decrease in the average balance of term notes. The average balance
of term notes for the six month period decreased from $84.0 million in 1999 to
$79.0 million in 2000, a decrease of $5.0 million or 5.95%.
Interest expense on advances from FHLB increased $1.4 million and $2.0 million
for the three and six months ended June 30, 2000, respectively, as compared to
the corresponding periods in 1999. For the six months ended June 30, the
average balance of advances from FHLB increased from $34.4 million in 1999 to
$93.4 million in 2000, an increase of $59.0 million or 171.57%.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $2.0 million for the three months ended June
30, 1999 and 2000. For the six months ended June 30, 2000, the provision was
$4.0 million, compared to $3.5 million for the same period in 1999, an increase
of $500,000 or 14.29%. The allowance for loan losses amounted to $26.9 million
as of June 30, 2000, compared to $24.0 million as of December 31, 1999, an
increase of $2.9 million or 12.11%. The allowance for loan losses is maintained
at a level which, in management's judgment, is adequate to absorb possible
credit losses inherent in the loan portfolio. The amount of the allowance is
based on management's evaluation of the collectibility of the loan portfolio,
including the nature of the portfolio, credit concentrations, trends in
historical loss experience, specific impaired loans, and current economic
conditions. Allowances for impaired loans are generally determined based on
collateral values or the present value of estimated cash flows. Because of
uncertainties in the estimation process, management's estimate of credit losses
inherent in the loan portfolio and the related allowance may change in the near
term.
22
<PAGE> 25
OTHER INCOME
Total other income increased $231,000 or 8.30% during the three months ended
June 30, 2000, and increased $284,000 or 4.77% during the six months ended June
30, 2000, as compared to the corresponding periods in 1999.
Service charges on deposit accounts and other fees increased $760,000 or 27.71%
and $1.2 million or 21.42% for the three and six months ended June 30, 2000,
respectively, as compared to the corresponding periods in 1999.
OPERATING EXPENSES
Total operating expenses decreased $1.5 million or 10.64% during the three
months ended June 30, 2000, and $729,000 or 2.74% for the six months ended June
30, 2000, as compared to the corresponding periods in 1999.
Salaries and employees' benefits, which is the largest component of total
operating expenses, decreased $805,000 or 14.53% and $633,000 or 5.91% for the
three and six months ended June 30, 2000, as compared to the corresponding 1999
periods. Such decreases were primarily the result of a strict cost reduction
plan while at the same time supporting the expansion of the Company.
Equipment expenses increased $638,000 or 41.22% and $1.1 million or 38.28% for
the three and six months ended June 30, 2000, as compared to the same periods
in 1999. The increases were the result of continued investment in technological
resources to support expansion of the Company, increases on furniture and
fixtures and equipment expenses, including depreciation, as well as on property
taxes.
Advertising expense decreased $656,000 or 53.67% and $653,000 or 29.25% for the
three and six months ended June 30, 2000, respectively, as compared to the
corresponding periods in 1999.
Other expenses decreased $672,000 or 11.70% and $584,000 or 5.47% for the three
and six months ended June 30, 2000, respectively, as compared to the
corresponding periods in 1999, again a decrease as a result of the strict cost
control measures implemented.
PROVISION FOR INCOME TAXES
Under Puerto Rico income tax laws, the Company is required to pay the higher of
an alternative minimum tax of 22% or a regular statutory rate up to 39%. The
current provision for estimated Puerto Rico income taxes amounted to $1.95
million and $4.5 million for the three and the six months ended June 30, 2000,
respectively. Deferred income taxes reflect the impact of credit carryforwards
and "temporary differences" between amounts of assets and liabilities for
financial reporting purposes and their respective tax bases. Activities
relating to the Westernbank International division are exempt for income tax
purposes. As a result of the above, the Company's effective tax rate is
substantially below the statutory rate.
23
<PAGE> 26
NET INCOME
Net income increased $1.6 million or 16.90% and $3.2 million or 17.04% for the
three and six months ended June 30, 2000, as compared to the corresponding
periods in 1999. The increase for the three months ended June 30, 2000, is
mainly due to a decrease in operating expenses and in the provision for income
taxes. The increase for the six months ended June 30, 2000, is mainly the
result of the increase in net interest income, which was partially offset by an
increase in the provision for loan losses, and decreases in operating expenses
and in the provision for income taxes.
MINIMUM REGULATORY CAPITAL REQUIREMENTS
The Company, as a bank holding company, is subject to regulation, supervision,
and examination by the Federal Reserve Board. Westernbank, as a bank chartered
under the laws of the Commonwealth of Puerto Rico, is subject to regulation,
supervision and examination by the FDIC, as its primary federal regulator, and
by the Puerto Rico Commissioner of Financial Institutions ("the Puerto Rico
Commissioner").
The Company (on a consolidated basis) and Westernbank (the Companies) are
subject to various regulatory capital requirements administered by the federal
banking agencies. Failure to meet minimum capital requirements can initiate
certain mandatory and possibly additional discretionary actions by regulators
that, if undertaken, could have a direct material effect on the Companies'
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Companies must meet specific
capital guidelines that involve quantitative measures of their assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk weightings,
and other factors. Prompt corrective action provisions are not applicable to
bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy
require the Companies to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to
average assets (as defined). Management believes, as of June 30, 2000, that the
Companies met all capital adequacy requirements to which they are subject.
As of June 30, 2000, the most recent notification from the FDIC categorized
Westernbank as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, an institution must
maintain minimum total risk-based, Tier I risk-based, and Tier I leverage
ratios as set forth in the following tables. There are no conditions or events
since the FDIC notification that management believes have changed Westernbank's
category.
24
<PAGE> 27
The Companies' actual capital amounts and ratios as of June 30, 2000, are also
presented in the table below:
<TABLE>
<CAPTION>
Minimum To Be
Minimum Well Capitalized Under
Capital Prompt Corrective
Actual Requirement Action Provisions
------------------- ------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Total Capital to Risk Weighted Assets:
Consolidated $ 260,405 12.87% $ 161,903 8.0% N/A N/A
Westernbank 260,405 12.87 161,903 8.0 $ 202,379 10%
Tier I Capital to Risk Weighted Assets:
Consolidated 235,088 11.76 79,939 4.0 N/A N/A
Westernbank 235,088 11.76 79,939 4.0 119,908 6.0
Tier I Capital to Average Assets:
Consolidated 235,088 6.80 103,659 3.0 N/A N/A
Westernbank 235,088 6.80 103,659 3.0 172,764 5.0
</TABLE>
The Company's ability to pay dividends to its stockholders and other activities
can be restricted if its capital falls below levels established by the Federal
Reserve guidelines. In addition, any bank holding company whose capital falls
below levels specified in the guidelines can be required to implement a plan to
increase capital.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK AND ASSET/LIABILITY MANAGEMENT
The principal objective of the Company's asset and liability management
function is to evaluate the interest rate risk included in certain balance
sheet accounts and in off-balance sheet commitments, determine the appropriate
level of risk given the Company's business focus, operating environment,
capital and liquidity requirements and performance objectives, establish
prudent asset concentration guidelines and manage the risk consistent with
Board of Directors approved guidelines. Through such management, the Company
seeks to reduce the vulnerability of its operations to changes in interest
rates and to manage the ratio of interest rate sensitive assets to interest
rate sensitive liabilities within specified maturities or repricing dates.
The Company's profitability is dependent to a large extent upon its net
interest income, which is the difference between its interest income on
interest-earning assets, such as loans and investments, and its interest
expense on interest-bearing liabilities, such as deposits and borrowings. The
Company is subject to interest rate risk to the degree that its
interest-earning assets reprice differently than its interest-bearing
liabilities.
25
<PAGE> 28
Interest rate risk can be defined as the exposure of the Company's operating
results or financial position to adverse movements in market interest rates,
which mainly occur when assets and liabilities reprice at different times and
at different rates. The Company manages its mix of assets and liabilities with
the goals of limiting its exposure to interest rate risk, ensuring adequate
liquidity, and coordinating its sources and uses of funds. Specific strategies
have included shortening the amortized maturity of fixed-rate loans and
increasing the volume of variable rate loans to reduce the average maturity of
the Company's interest-earning assets, entering into interest rate exchange
agreements (swaps) to hedge variable term notes and fixed callable certificates
of deposit as well as entering into interest rate options (caps) contracts on
its variable rate reverse repurchase agreements.
The Company is exposed to a reduction in the level of Net Interest Income
("NII") in a rising interest rate environment. NII will fluctuate pursuant to
changes in the levels of interest rates and of interest-sensitive assets and
liabilities. If (1) the weighted average rates in effect at year end remain
constant, or increase or decrease on an instantaneous and sustained change of
plus or minus 200 basis points, and (2) all scheduled repricing, reinvestments
and estimated prepayments, and reissuances are at such constant, or increase or
decrease accordingly; NII will fluctuate as shown on the following table:
June 30, 2000:
<TABLE>
<CAPTION>
Change in Interest Rate Expected NII (1) Amount Change % Change
----------------------- ---------------- ------------- --------
(Dollars in thousands)
<S> <C> <C> <C>
+200 Basis Points $ 81,888 $ (6,679) (7.54)%
Base Scenario 88,567 -- --
-200 Basis Points 93,987 5,420 6.12
</TABLE>
December 31, 1999:
<TABLE>
<CAPTION>
Change in Interest Rate Expected NII (1) Amount Change % Change
----------------------- ---------------- ------------- --------
(Dollars in thousands)
<S> <C> <C> <C>
+200 Basis Points $ 84,334 $ (16,330) (16.22)%
Base Scenario 100,664 -- --
-200 Basis Points 115,736 15,072 14.97
</TABLE>
-------------------------------------
(1) The NII figures exclude the effect of the amortization of loan fees.
The model utilized to create the information presented above makes various
estimates at each level of interest rate change regarding cash flows from
principal repayments on loans and mortgage-backed securities and/or call
activity on investment securities. Actual results could differ significantly
from these estimates which would result in significant differences in the
calculated projected change. In addition, the limits stated above do not
necessarily represent the level of change under which management would
undertake specific measures to realign its portfolio in order to reduce the
projected level of change.
26
<PAGE> 29
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the opinion of the Company's management, the pending and threatened legal
proceedings of which management is aware will not have a material adverse
effect on the financial condition and results of operations of the Company.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders of W Holding Company, Inc. was held at Best
Western Mayaguez Resort & Casino, located at Road 104, km. 0.3, Mayaguez,
Puerto Rico, at 1:30 P.M. on May 18, 2000, pursuant to due notice, to elect two
directors for a term of three years or until the successors have been elected
and qualified (proposal no. 1), and to ratify the appointment of Deloitte &
Touche LLP as the Bank's independent auditors for 2000 (proposal no. 2). The
total number of votes eligible to be cast as of the record date of the meeting
(March 31, 2000) was 41,562,500. The two proposals were approved. The results
of the election, as certified by representatives of the Bank of New York, duly
appointed inspectors of election of the annual meeting, were as follows:
PROPOSAL NO. 1
<TABLE>
<S> <C>
For: 34,522,127
Against: 341,071
Abstain: 26,842
</TABLE>
PROPOSAL NO. 2
<TABLE>
<S> <C>
For: 34,217,790
Against: 669,085
Abstain: 3,165
</TABLE>
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A - Financial Statements Schedules
No schedules are presented because the information is not applicable or is
included in the Consolidated Financial Statements or in the notes thereto
described in 6(c) below.
B - Reports on Form 8-K
No current reports on Form 8-K were filed with the Securities and Exchange
Commission during the quarter ended June 30, 2000.
C - Exhibits
Exhibits filed as part of this Form 10-Q:
27-1 Financial Data Schedule
27
<PAGE> 30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of l934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Registrant:
W HOLDING COMPANY, INC.
Date: August 14, 2000 By /s/ Frank C. Stipes, Esq.
--------------------------------------
Frank C. Stipes, Esq.
Chairman of the Board,
Chief Executive Officer and
President
Date: August 14, 2000 By /s/ Freddy Maldonado
--------------------------------------
Freddy Maldonado,
Chief Financial Officer and Vice
President of Finance and Investment
28
